REAL ESTATE BLOG -- GEOFFREY S. GOSS

EB-5 funding: Still another option for expanding project financing

Geoffrey S. Goss is a partner in the Real Estate Practice Group of Cleveland-based Walter & Haverfield.

As the spring building season fast approaches, there are already clear signs that the real estate market is rebounding and development activity is expanding.

Unfortunately, a motivated commercial real estate market could be restrained by capital lending markets which seem to be lagging behind in terms of growth and access to funds. Therefore, builders are still forced to consider more innovative funding sources. The growth in popularity of tax credit lending, as well as the more broad-scale utilization of mezzanine funding, shows that real estate firms are constantly seeking alternative financial arrangements.

A somewhat lesser known funding option, but one which has shown significant growth in recent years, is the immigration related EB-5 program. Created through the Immigration Act of 1990, EB-5 allows a foreign national to qualify for permanent residency in the U.S. under the employment-centered fifth preference category (thus the moniker “EB-5”). A foreign national seeking to take advantage of EB-5 can either invest directly in a U.S.-based business or, as is more typical, invest through an existing EB-5 investment company. The latter system provides the financing conduit most useful to real estate development.

Typically, EB-5 lending and investment activities are coordinated through regional centers designated by the United States Citizenship and Immigration Service (USCIS). These regional centers, several of which are located in Northeastern Ohio, focus on specific geographic areas. The regional centers work to promote economic growth through increased exports, increased productivity, new job creation, and the expansion of domestic capital investment opportunities.

From a foreign national investor's financial perspective, the key component of EB-5 directed investments are the resulting jobs created through investment. While the base investment amount is $1 million per person, the required investment, if it is made in a targeted employment area--a rural or urban area with an unemployment rate that is at least 150 percent of the national average--is only $500,000.

From a commercial real estate investment and funding perspective, EB-5 money can be used for almost any commercial real estate project -- office, industrial, hotel, multi-family and others. A developer may approach a regional center (or vice versa) as a means to diversify a project's capital stack or simply to take advantage of the lower-interest rate financing typically offered through an EB-5 loan. EB-5 investments can be made either as direct equity or, as is more typical, a loan.

It must be cautioned that projects which utilize EB-5 generated funding are subject to USCIS review and approval, and the ultimate delivery of funds can take considerable time. An EB-5 investment will weave through a 9-to-12- month review process both with respect to the project and the investors. This process will include a detailed review of the project and its business plan; negotiation and execution of the lending/investment documents between the project sponsor and the regional center; marketing of the investment opportunity overseas; securing of foreign investment funds; application, review and processing of visa applications of investors; and, following all reviews and approvals, delivery of investment proceeds to the project, pursuant to the financing/investment documents.

Smaller projects may not be cost-effective for EB-5

If both the project and an investor are approved by the USCIS, each investor will receive a conditional two-year green card. The investor, spouse and any unmarried children (under age 21) can then apply for permanent residency based on the investment. If approved, the investor and his/her immediate family become permanent green card holders and can later apply to become U.S. citizens. Upon receipt of conditional permanent resident status, the investor and immediate family are entitled to the same benefits as other lawful permanent residents.

For eligible projects, EB-5 funds may provide yet another option to consider as developers seek to diversify a project's capital stack. Although there is no stated minimum project-

based investment required, given the cost and time involved in securing necessary funds and approvals, projects requiring less than $5 million through the EB-5 program may not be cost effective. Sponsors of large development projects, particularly those with lengthy lead or build times, however, may find significant benefits and financing cost savings using EB-5 funds.

As with many new and developing programs, rules and regulations applicable to the EB-5 program remain quite fluid. Thus, developers wishing to utilize such funds should consult experienced EB-5 counsel to ensure appropriate compliance is maintained to allow for a successful project.

Attorney Geoffrey Goss is a partner in the Real Estate Practice Group of Cleveland-based Walter & Haverfield.

Reader Comments

Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Crain's Cleveland Business. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification. Comments may be used in the print edition at editorial discretion.